The COVID-19 pandemic continues to cause severe economic disruption throughout the United States and around the world, with declared states of emergency and stay-at-home orders impacting almost every sector of the economy. As a result, many businesses are turning to their insurance policies for potential financial recovery.
Business interruption insurance provides a company with coverage for an unexpected interruption to its income stream due to a loss event. For the foreseeable future, insurers will be inundated with coronavirus-related business interruption claims and there is much uncertainty around whether such losses will be covered. While the answers to coverage questions will likely vary by state and according to specific policy terms, it is still worthwhile to plan a course of action and take the initial steps to prepare a claim.
Claims that are well-documented and have reasonable support stand the best chance of being processed expeditiously and result in higher settlement values. Below are five steps companies should take now to ensure their claim does not get bogged down in reviews or, worse, a dispute.
1. Develop an Action Plan
To prepare a technically sound and well-supported business interruption claim, the insured should start by identifying the team to manage the process from preparation to final resolution, including both internal and external resources needed to develop and execute an action plan.
Given the current complexities around pandemic-related losses, the next step is a thorough review of the enterprise’s insurance policies to determine coverage. Notification requirements also need to be addressed, and the team should plan to work with their broker and stay in regular contact with their insurance adjuster throughout the claim process.
If the claim is complex—as it almost certainly will be with COVID-19 claims—coverage counsel can help clarify potential coverage issues and positioning, and accountants experienced in business interruption claims can help simplify claim preparation. (Note that claim preparation fees are commonly covered by insurance.)
2. Measure the Business Income Loss
To maximize recovery, the business income loss calculation needs to be objective, supportable and technically sound. It is important to remember that this measurement is not solely the revenue loss but the revenue loss less the expenses that would have been incurred to generate such revenue. Common areas of scrutiny and challenge include:
- Correlation of the income loss to the loss event (Did the event cause the loss being claimed?)
- Ordinary course of business forecasts prepared before the loss event (How does the claimed lost income compare to pre-event results?)
- Trending historical results and achievement of prior budgets (What is the history of being able to estimate results?)
- Market, industry and economic conditions that may impact the company’s financial results (How does the claimed loss include the impact of external factors?)
- Make-up sales and other potential offsets (What efforts have been made to reduce the lost income?)
The determination of the indemnity period is often challenged as well. The indemnity period is defined in the policy, but typically starts at the date the loss event occurred and ends on the date that the company resumes normal operations. Given that federal, state and local COVID-19 restrictions impacting businesses are still in place and there is no currently established timeframe for those restrictions to be fully lifted, an “end” date is not yet determinable. However, the company should begin assessing when normal operations might resume.
3. Identify Extra Expenses
In addition to lost income, most policies cover expenses that are not normally incurred by the business and are attributable to the loss event. For instance, COVID-19 has forced businesses that are still operating to incur expenses related to cleaning and disinfecting work areas beyond what most companies typically perform.
Extra expenses may also include costs incurred to mitigate covered losses. This will include expenses necessary to reduce the length of the loss period, continue operations during the loss period or rebuild inventory depleted during the loss period. Examples include freight costs to expedite goods from suppliers, the cost of equipment purchased to allow employees to work remotely, costs associated with shifting production to other locations, and costs of paying for employee overtime or temporary labor.
Extra expenses and expediting expenses should be recorded in specially designated accounts in the company’s general ledger. This will allow for more efficient tracking to ensure proper inclusion in a claim.
4. Develop and Execute a Loss Mitigation Plan
Evidence of the insured’s efforts to mitigate costs will be a significant focus for the adjuster. Mitigation efforts could include operating from different or temporary locations and identifying other sources of supplies or customers. After a loss is known, the company should develop a comprehensive mitigation strategy that includes an assessment of possible recovery scenarios—worst, base and best cases—to resume normal operations.
A mitigation plan should include a cash-flow projection that will not only provide the company with needed insight into a recovery plan, but can also be used to support a request for partial advance payments from the insurance company (assuming the insurer has not rejected all claims related to COVID-19). Further, the need to incur extra expenses can be projected and pre-approval for these expenses can be sought from the insurer.
5. Collect and Maintain Supporting Documentation
One of the most critical factors in successfully settling a business interruption claim is the ability to document and support each claim element. Proper documentation will make it more difficult for an adjuster to deny elements of a claim. To help expedite your claim process, use any downtime or pandemic-related lull in business to assemble these documents in advance:
- Two years of historical financial statements/budgets/projections
- Current budgets, business plans, projections of business operations and income covering the interruption period
- General ledgers, financial statements, and customer sales registers
- Invoices supporting extra and expediting expenses
- Logs and other evidence of the company’s indemnity period and its efforts to resume business operations
Business interruption insurance intends to put the insured back into the same financial position it would have been in if not for the loss event. For the best chance of maximizing business recovery in a timely manner, companies should make a plan, get outside help as needed, and stay in close contact with their insurance adjuster to prepare a claim that is well-documented, technically sound and supported with objective evidence.
Michael Yachnik is partner at StoneTurn, a global advisory firm specializing in regulatory, risk and compliance issues, investigations and business disputes.